Chapter 7 Production and Growth

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Chapter 7 - Production and Growth

1. What is the most appropriate measure of a nation’s standard of living?
a. real GDP b. real GDP per person
c. nominal GDP d. nominal GDP per person
ANSWER: b
2. Which statement best explains the importance of real GDP per person?
a. It is a useful measure of economic growth.
b. It is a useful measure of the health of citizens.
c. It is a useful measure of the cost of living.
d. It is a useful measure of well-being.
ANSWER: d
3. Which of the following best describes changes in the average well-being in a country?
a. the growth rate of the unemployed b. the growth rate of nominal GDP
c. the growth rate of real GDP d. the growth rate of real GDP per person
ANSWER: d
4. How does income in developing countries like India and Pakistan compare with that in Canada?
a. It’s about 1/16 or less of that in developed countries like
Canada.
b. It’s about 1/8 of that in developed countries like Canada.
c. It’s about 1/4 of that in developed countries like Canada.
d. It’s about 1/3 to 1/2 of that in developed countries like Canada.
ANSWER: b
5. Over the past century in Canada, by how much has real GDP per person grown?
a. by about 1 percent per year b. by about 2 percent per year
c. by about 4 percent per year d. by about 8 percent per year
ANSWER: b
6. In approximately how many years will real GDP per person in Canada double, given its average growth rate during the
past century?
a. 25 years b. 35 years
c. 50 years d. 80 years
ANSWER: b
7. Over the past 100 years, Canadian real GDP per person has doubled about every 35 years. If in the next 100 years it
doubles every 20 years, then what will Canadian real GDP per person be a century from now?
a. 10 times higher than it is now b. 12 times higher than it is now
c. 16 times higher than it is now d. 32 times higher than it is now
ANSWER: d
8. Which statement best characterizes the variations in real GDP per person and its rate of growth across countries?
a. Real GDP per person differs widely across countries, but the growth rate of real GDP per person is similar
across countries.
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b. Real GDP per person is very similar across countries, but the growth rate of real GDP per person differs
widely across countries.
c. Real GDP per person and the growth rate of real GDP per person are similar across countries.
d. Real GDP per person and the growth rate of real GDP per person vary widely across countries.
ANSWER: d
9. Over the past century in Canada, by how much has average income grown as measured by real GDP per person?
a. about 1 percent per year, which implies a doubling about every 70 years
b. about 2 percent per year, which implies a doubling about every 35
years
c. about 3.5 percent per year, which implies a doubling about every 20 years
d. about 4 percent per year, which implies a doubling about every 17.5 years
ANSWER: b
10. As measured by real GDP per person, approximately how much higher is average income in Canada today than it was
140 years ago?
a. 8 times higher b. 10 times higher
c. 13 times higher d. 17 times higher
ANSWER: d
11. How does income per person in Canada compare with income per person in China and India?
a. It is about 3.5 times that in China and 8 times that in
India.
b. It is about 12 times that in China and 10 times that in India.
c. It is about 10 times that in China and 13 times that in India.
d. It is about 18 times that in China and 16 times that in India.
ANSWER: a
12. Which country had the highest growth rate between 1900 and 2014?
a. China b. Brazil
c. Mexic d. the United Kingdom
o
ANSWER: b
13. Compared to the income of the typical Canadian 144 years previously, how much was the income of the typical
Pakistani in 2014?
a. about 1/2 as b. about 2/3 as much
much
c. about the same d. about 2 times as much
ANSWER: d
14. Which country had the lowest growth rate over the period 1870 and 2014?
a. the United Kingdom b. Mexico
c. Brazil d. the United States
ANSWER: a
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15. How large was the growth rate of Japan over the period 1890–2014?
a. 1.5 percent b. 1.75 percent
c. 2.59 percent d. 3.02 percent
ANSWER: c
16. Which nation experienced average rates of economic growth of more than 2.0 percent between 1900 and 2014?
a. Brazil b. India
c. Bangladesh d. the United Kingdom
ANSWER: a
17. In 1870, what was the richest country in the world?

a. Canada b. the United States
c. the United Kingdom d. France
ANSWER: c
18. According to a 1998 list published by American Heritage magazine, who was the richest American of all time?
a. Henry Ford b. Warren Buffett
c. John D. d. Bill Gates
Rockefeller
ANSWER: c
19. Which statement best describes the relationship between the initial wealth and the growth rate of a country?
a. Countries with the highest growth rates over the past 140 years are the ones that had the highest level of real
GDP 140 years ago.
b. Countries that were rich 140 years ago had little fluctuation around their average growth rates during the past
100 years.
c. Though the catch-up effect may suggest otherwise, the data show no strong relationship between initial
conditions and growth rates.
d. Over the past 140 years, the United States had the highest real GDP growth rate, and now it has the highest
real GDP per person.
ANSWER: c
20. Which statement best defines productivity?

a. Productivity is the ability of a company to generate profit.
b. Productivity is the quantity of goods and services that a nation can produce in a year.
c. Productivity is the number of goods or services that a worker can produce in one
hour.
d. Productivity is the ability of a company to produce goods and services.
ANSWER: c
21. What is the average amount of goods and services produced from each hour of a worker’s time called?
a. per capita GDP b. per capita national income
c. productivity d. human capital
ANSWER: c
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22. How is a nation's standard of living determined?
a. by its productivity b. by its gross domestic product
c. by its national income d. by the size of its labour force
ANSWER: a
23. Last year, real GDP per person in Midlothian was $8000. The year before, it was $6000. What was the growth rate of
real GDP per person?
a. 10 percent b. 16.2 percent
c. 25 percent d. 33.33 percent
ANSWER: d
24. Last year, real GDP in Oceania was $620 billion, and the population was 2.3 million. The year before, real GDP was
$502 billion and the population was 2.0 million. What was the approximate growth rate of real GDP per person?
a. 3 percent b. 7 percent
c. 10 percent d. 17 percent
ANSWER: b
25. In 2018, real GDP in the Kingdom of Fife was $500 billion and the population was 2 million. In 2019, real GDP was
$660 billion and the population was 2.2 million. What was the approximate growth rate of real GDP per person?
ANSWER: d
26. In 2018, Freedonia had a population of 2700 and real GDP of about $1,080,000. In 2017, it had a population of 2500
and real GDP of about $1,000,000. What was the approximate growth rate of real GDP per person in Freedonia between
2017 and 2018?
a. 0 percent b. 2.5 percent
c. 5 percent d. 7.5 percent
ANSWER: a
27. How does productivity explain the differences in standard of living across countries?
a. Productivity tends to be lower in countries with high population, and therefore in those countries standards of
living are lower.
b. Productivity explains very little of the differences across countries in the standard of living.
c. Productivity explains some, but not most, of the differences across countries in the standard of living.
d. Productivity explains most of the differences across countries in the standard of living.
ANSWER: d
28. What is a correct way to measure productivity?

a. divide the number of hours worked by output
b. divide output by the number of hours worked
c. divide the number of workers by output
d. divide output by the number of workers
ANSWER: b

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29. Kawartha Furniture uses 8 workers working 10 hours to produce 160 rocking chairs. What is the productivity of these
workers?
a. 1 chair per hour b. 2 chairs per hour
c. 10 chairs per d. 80 chairs per day
day
ANSWER: b
30. Why are Canadian workers more productive than the Chinese?

a. because Canada is a federal state
b. because Canadians have more capital to work with
c. because prices are higher in Canada than in China
d. because the most productive Chinese workers have emigrated to
Canada
ANSWER: b
31. Which statement best describe the relationship between productivity and standard of living?
a. International trade makes a country’s productivity irrelevant.
b. A country’s standard of living and its productivity are closely related.
c. Productivity only increases revenue to investors, while general well-being is not
affected.
d. A rich country can enjoy a high standard of living without the need for high productivity.
ANSWER: b
32. Tom works 6 hours a day and Jerry works 8 hours. Tom can produce 6 baskets of goods while Jerry can produce 7
baskets. What can we conclude?
a. Tom’s productivity is greater than Jerry’s.
b. Tom’s and Jerry’s productivities are equal because they both work one
day.
c. Tom’s and Jerry’s productivities cannot be compared.
d. Tom’s productivity is lower than Jerry’s.
ANSWER: a
33. Monica works 8 hours and produces 7 units of goods per hour. Rachel works 6 hours and produces 10 units of goods
per hour. What can we conclude?
a. Monica’s productivity and output are greater that Rachel’s.
b. Monica’s productivity is greater than Rachel’s, but Monica’s output is less.
c. Rachel’s productivity and output are greater than Monica’s.
d. Rachel’s productivity is greater that Monica’s, but Rachel’s output is less.
ANSWER: c
34. Lesley looks over reports on four of her workers. Smith made 30 baskets in 6 hours. Dex made 40 baskets in 10 hours.
Leo made 55 baskets in 10 hours. Neve made 21 baskets in 3 hours. Who has the greatest productivity?
a. Nev b. Smith
e
c. Dex d. Leo
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ANSWER: a
35. What is a direct determinant of productivity?

a. human capital b. wage
c. price of natural resources d. unemployment rate
ANSWER: a
36. What do economists call the inputs used to produce goods and services?
a. productivity b. capitalization producers
indicators
c. production functions d. factors of production
ANSWER: d
37. What do economists call the equipment and structures available to produce goods and services?
a. physical capital b. human capital
c. production inputs d. technology
ANSWER: a
38. What would an economist call the tractors, hay balers, and combine harvesters that are used on a farm?
a. human capital b. physical capital
c. production d. technological knowledge
resources
ANSWER: b
39. Which of the following would NOT be considered physical capital?

a. a sewing machine in an alterations shop
b. a computer used to help Mercury Delivery Service keep track of their
orders
c. on-the-job training
d. a desk used in an accountant’s office
ANSWER: c
40. Which of the following would be considered physical capital?

a. the projector at a cinema
b. milk and cheese
c. the skills and knowledge of a chef
d. the number of hours people spend in the gym
ANSWER: a
41. What best defines human capital?

a. the knowledge and skills that workers acquire through education, training, and experience
b. the stock of equipment and structures that is used to produce goods and services
c. the total number of workers in the labour force
d. the total amount that is paid in wages in an economy
ANSWER: a
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42. Which of the following is considered human capital?

a. the number of computers available in schools and universities
b. the average percentage of income people give to charity
c. the number of persons in the labour force
d. knowledge acquired from an apprenticeship program
ANSWER: d

a. lunches served in a school cafeteria
b. a new convection oven
c. an apprentice chef working in an upscale restaurant
d. the pots and pans used to prepare meals
ANSWER: c

a. better working conditions
b. safety in the workplace
c. the things you have learned this semester
d. machinery that requires a human to operate
ANSWER: c
45. Clive Lloyd is a professor. Which of the following is a part of his human capital?
a. his experience in the classroom
b. the computer he uses
c. the software he uses to assess students’ work
d. the amount of time he spends with his students
ANSWER: a
46. Which of the following best describes natural resources?

a. native abilities that workers might possess
b. production inputs such as land, rivers, and mineral deposits
c. knowledge that is freely available and is used in production
d. public schools and universities where workers are prepared for life, for which companies do not have to
pay
ANSWER: b
47. Which list contains, in this order, natural resources, human capital, and physical capital?
a. for a restaurant: the land where it stands; the things the kitchen; the freezers where the steaks are
kept
b. for a furniture company: wood; the company cafeteria; saws
c. for a railroad: fuel; railroad engineers; railroad tracks
d. for an oil company: the oil it brings to surface; the rigs; the refineries using its oil
ANSWER: c
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48. What is an example of a non-renewable resource?

a. natural gas b. wind power
c. livestock d. a forest
ANSWER: a
49. In a market economy, what is scarcity of resources most clearly reflected in?
a. supply b. demand
c. market d. the stock of the resource
prices
ANSWER: c
50. In a market economy, when do we know that a resource has become scarcer?
a. when its price rises relative to other prices
b. when it is non-renewable and some of it is used
c. when substitutes exist
d. when there are no substitutes
ANSWER: a
51. In a market economy, what does the real, or inflation-adjusted, price of a resource measure?
a. contribution to revenue b. relative scarcity
c. relative importance d. contribution to
efficiency
ANSWER: b
52. What indicates greater scarcity of a natural resource?

a. an increase in its b. a decrease in its supply
demand
c. an increase in its price d. a decrease in its stock
ANSWER: c
53. Which has been happening to the market prices of most natural resources (adjusted for inflation)?
a. They have been rising. b. They have been stable or rising.
c. They have been stable or falling. d. They have been falling.
ANSWER: c
54. Based on historical data on the prices of natural resources, which statement best describes how natural resources limit
economic growth?
a. Prices have been increasing, which shows that natural resources become scarcer and this impedes growth.
b. Prices of natural resources have been fluctuating, which shows that there is no correlation between growth and
natural resources.
c. Prices of natural resources have been decreasing in constant dollars, which shows that natural resources
are not scarcer than they were in the past, thus economic growth is not limited by natural resources.
d. Prices do not show whether resources limit growth because the natural resources that economies use are not
the same today as those in the past.

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ANSWER: c
55. Which statement best explains the falling inflation-adjusted prices of most of the natural resources?
a. Most are renewable; therefore, the supply of natural resources is increasing.
b. Our ability to conserve natural resources is increasing faster than their depletion.
c. The demand for natural resources is diminishing due to the discovery of new
substitutes.
d. New deposits of natural resources have been discovered in emerging markets.
ANSWER: b
56. What would we expect to happen with prices or quantities of natural resources if they were becoming scarcer?
a. We would expect prices to be rising relative to other prices, as they have been.
b. We would expect prices to be rising relative to other prices, but this has not
occurred.
c. We would expect known quantities to be increasing, as they have been.
d. We would expect known quantities to be falling, but this has not occurred.
ANSWER: b
57. A leading environmental group recently published a report contending that humans are running a “resource deficit”
because we are using natural resources faster than they can be regenerated. The group claims that this means that
economic growth will eventually stop, and will even be reversed. How would an economist respond to this report?
a. An economist would agree with the report, and would point to rising natural resource prices as evidence.
b. An economist would agree with the report, but wouldn’t think it was important because emerging markets are
likely to discover additional natural resources.
c. An economist would disagree with the report, in part because it ignores the mitigating effects of
technological change.
d. An economist would disagree with the report because labour and capital are the primary determinants of
growth, and since they are plentiful, growth will not slow down.
ANSWER: c
58. Which statement best explains economists’ understanding of the facts concerning the relationship between natural
resources and economic growth?
a. A country with few or no domestic natural resources is destined to remain undeveloped.
b. Differences in natural resources have virtually no role in explaining differences in standards of living.
c. Some countries can be rich mostly because of their natural resources, and countries without natural resources
need not be poor, but can never have very high standards of living.
d. Abundant domestic natural resources may help make a country rich, but even countries with few
natural resources can have high standards of living.
ANSWER: d
59. In the country of Kasnia, the price of copper increased from $6 per kilogram to $6.60 per kilogram during a time when
the overall price level increased by 6 percent. During this period, what happened to the real price of copper?
a. It has increased by about 2 percent. b. It has decreased by about 4 percent.
c. It has decreased by about 8 d. It has increased by about 10 percent.
percent.
ANSWER: b
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60. Which statement best defines proprietary technology?

a. It is knowledge that is known but no longer relevant in a market.
b. It is knowledge that is known but has only recently been discovered.
c. It is knowledge that is known widely by those in a profession.
d. It is knowledge that is known only by the company that discovers it.
ANSWER: d
61. A management professor discovers a way for corporate management to operate more efficiently. He publishes his
findings in a journal. How are his findings best defined?
a. proprietary knowledge, because only who the person pays for the journal has access to the
findings
b. common knowledge, because scientific publications are not subject to copyright
c. proprietary knowledge, because the discoverer has intellectual property rights over the findings
d. common knowledge, because all are free to use the findings
ANSWER: d
62. Your company discovers a better way to produce lawn mowers, but your better methods are not apparent from the
lawn mowers themselves. What kind of knowledge is this?
a. common technological knowledge
b. common, but not technological, knowledge
c. proprietary technological knowledge
d. proprietary, but not technological, knowledge
ANSWER: c
63. Which statement best defines technological knowledge?

a. It is the same as human capital.
b. It is available information on how to produce things.
c. It is the resources expended transmitting society’s understanding to the labour
force.
d. It is knowledge related to computer literacy.
ANSWER: b
64. Which terms refers to the relationship between the quantity of output created and the quantity of inputs needed to
create it?
a. the capital accumulation function b. technological knowledge
c. the production function d. human capital
ANSWER: c
65. If your firm has constant returns to scale, what will happen to your firm’s output if you doubled all your inputs?
a. It would not b. It would increase, but by less than
change. double.
c. It would double. d. It would more than double.
ANSWER: c

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66. Suppose you build bird houses. One day, you double the time you spend building and double the wood, nails, paint,
and all the other inputs in order to build twice as many bird houses. What kind of production function is this?
a. decreasing returns to scale b. zero returns to scale
c. constant returns to scale d. increasing returns to scale
ANSWER: c
67. If there are constant returns to scale, how is the production function written?
a. xY = 2 x A F(L, K, H, N) b. Y/L = A F(xL, xK, xH, xN)
c. Y/L = A F( 1, K/L, H/L, N/L) d. xL = A F(1,Y, K, H, N)
ANSWER: c
68. If a production function has constant returns to scale, how can output be doubled?
a. by doubling labour
b. by doubling any one of the inputs
c. by doubling all of the inputs
d. by increasing all inputs by more than
double
ANSWER: c
69. If the production function for an economy had constant returns to scale, the labour force doubled, and all other inputs
stayed the same, what would happen to real GDP?
a. It would stay the same.
b. It would increase by 50 percent.
c. It would increase, but by something less than double.
d. It would double.
ANSWER: c
70. If the number of workers in an economy doubled, all other inputs stayed the same, and there were constant returns to
scale, what would happen to productivity?
a. It would fall to half its former b. It would fall, but by less than half.
value.
c. It would stay the same. d. It would rise, but by less than double.
ANSWER: b
71. Suppose that an economy with constant returns to scale doubled its physical capital stock, doubled its available natural
resources, and doubled its human capital, but kept the size of the labour force the same. How does the change in output
compare to the change in productivity?
a. Output would stay the same and so would its productivity.
b. Output and productivity would increase, but by less than double.
c. Output and productivity would increase by more than double.
d. Output would increase by less than double, but productivity would double.
ANSWER: b
72. Using the production function and notation in the text, what does K/L measure?
a. average wages per worker b. human capital per worker
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c. output per worker d. physical capital per worker
ANSWER: d
73. Which of the following does Y/L refer to?

a. productivity b. output
c. the availability of capital d. the amount of human capital
technology
ANSWER: a
74. Suppose that over the past ten years productivity grew faster in Cayo than in San Marcos and the population of both
countries was unchanged. What can we conclude?
a. Real GDP per person must be higher in Cayo than in San Marcos.
b. Real GDP per person grew faster in Cayo than in San Marcos.
c. The standard of living must be higher in Cayo than in San
Marcos.
d. Cayo must have had a greater capital stock than San Marcos.
ANSWER: b
75. Suppose that real GDP grew more in El Dorado than in Atlantis last year. What does this imply concerning
productivity or standard of living?
a. El Dorado must have a higher standard of living than Atlantis.
b. El Dorado’s productivity must have grown faster than Atlantis’s.
c. El Dorado must have a higher real GDP than Atlantis.
d. El Dorado’s productivity must have been higher only if the population in the two countries grew at the
same rate.
ANSWER: d
76. What would increase productivity, everything else being the same?

a. an increase in immigration
b. an increase in the number of hours of work per week
c. an increase in prices
d. an increase in physical capital per worker
ANSWER: d
77. One of the ten principles of economics is that people face tradeoffs. The growth that arises from capital accumulation
is not a free lunch. What is the opportunity cost of that capital accumulation?
a. People need to work longer hours, thus having less time for leisure.
b. People need to consume less goods and services now in order to enjoy more consumption in the future.
c. People need to recycle resources so that future generations can produce goods and services with the
accumulated capital.
d. People need to devote less time in school and more at work.
ANSWER: b
78. What is one of the consequences of accumulating capital?

a. Accumulating capital requires that society sacrifice consumption in the present.
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b. Accumulating capital allows society to consume more in the present.
c. Accumulating capital decreases saving rates.
d. Accumulating capital increases income inequality.
ANSWER: a
79. How can a government encourage growth and, in the long run, raise the country’s economic standard of living?
a. by encouraging population growth b. by encouraging consumption
c. by encouraging saving and d. by increasing government spending
investment
ANSWER: c
80. Which statement best explains how investment and growth rates relate across countries?
a. They are negatively related.
b. They are positively related.
c. They are negatively related for rich countries, but positively related for poor
countries.
d. They are positively related for rich countries, but negatively related for poor
countries.
ANSWER: b
81. In the traditional view, which production process is considered when studying economic growth?
a. constant returns
b. increasing returns
c. diminishing returns
d. diminishing returns for low levels of capital, and increasing returns for high levels of
capital
ANSWER: c
82. What does diminishing returns to capital imply?

a. Capital produces fewer goods as it ages.
b. The value of new technology decreases over time.
c. Increases in the capital stock eventually decrease output.
d. Increases in the capital stock increase output by ever smaller amounts.
ANSWER: d
83. What is the effect of a higher saving rate in the long run?

a. It decreases the capital b. People must consume less in the future.
stock.
c. It increases productivity. d. It leads to higher growth in real GDP.
ANSWER: c
84. Suppose a country were to increase its saving rate. In the long run, what would also increase?
a. its income and productivity levels
b. its income growth rate and productivity level
c. its income level and productivity growth rate
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d. its income and productivity growth rates
ANSWER: a
85. If a country’s saving rate increases, what happens in the long run?
a. Income decreases faster. b. Productivity increases
faster.
c. Productivity decreases. d. Income increases.
ANSWER: d
86. If a country’s saving rate increases, what happens in the long run?
a. Productivity does not change. b. Real GDP per person decreases.
c. Real GDP per person does not change. d. Productivity increases.
ANSWER: d
87. Suppose Mexico increases its saving rate. What will happen in the long run?
a. The growth rates of productivity and real GDP per person will increase.
b. Productivity and real GDP per person will increase.
c. The growth rate of productivity will increase, and real GDP per person will increase.
d. Productivity will increase, and the growth rate of real GDP per person will increase.
ANSWER: b
88. Suppose that Poland undertakes policy to increase its saving rate. What will this policy most likely do?
a. It will have no impact on GDP growth.
b. It will lead to somewhat higher GDP growth for a few years.
c. It will lead to substantially higher GDP growth for a period of several decades.
d. It will lead to a permanently higher growth rate.
ANSWER: c
89. Other things equal, how do relatively poor countries tend to grow?

a. They grow slower than relatively rich countries; this is called the poverty trap effect.
b. They grow slower than relatively rich countries; this is called the savings effect.
c. They grow faster than relatively rich countries; this is called the catch-up effect.
d. They grow faster than relatively rich countries; this is called the diluting capital
effect.
ANSWER: c
90. Suppose that there are diminishing returns to capital. Suppose also that two countries are the same except one has less
capital, and so less real GDP per person, than the other. Suppose that the saving rate in both countries increases from 5
percent to 6 percent. What would we expect over the next 10 years?
a. The growth rate will not change in either country.
b. The country with less capital will grow faster.
c. The country with more capital will grow faster.
d. Both countries will grow at the same rate.
ANSWER: b

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91. Suppose that there are diminishing returns to capital. Suppose also that two countries are the same except one has less
capital, and so less real GDP per person. Suppose that both increase their saving rate from 3 percent to 4 percent. What
will happen in the long run?
a. Both countries will have permanently higher growth rates of real GDP per person, and the growth rate will be
higher in the country with more capital.
b. Both countries will have permanently higher growth rates of real GDP per person, and the growth rate will be
higher in the country with less capital.
c. Both countries will have higher levels of real GDP per person, and the temporary increase in growth in the
level of real GDP per person will have been greater in the country with more capital.
d. Both countries will have higher levels of real GDP per person, and the temporary increase in growth in
the level of real GDP per person will have been greater in the country with less capital.
ANSWER: d
92. Real GDP per person is $50,000 in Andromeda, $40,000 in Cosmos, $30,000 in Circinus, and $10,000 in Myall.
Saving per person is $4000 in all four countries. Other things equal, what would we expect?
a. All four countries will grow at the same
rate.
b. Andromeda will grow the fastest.
c. Cosmos will grow the fastest.
d. Myall will grow the fastest.
ANSWER: d
93. Other things the same, if a country increased its saving rate what would that country likely have in 40 years?
a. higher productivity and a higher growth rate of real GDP
b. higher productivity but not a higher growth rate of real
GDP
c. the same productivity and growth of real GDP it began with
d. higher productivity growth rate and higher real GDP
ANSWER: b
94. Which statement best defines the catch-up effect?

a. It is the idea that saving will always “catch up” with investment spending.
b. It is the idea that it is easier for a country to grow fast and “catch up” with richer countries if it starts
out relatively poor.
c. It is the idea that rich countries aid relatively poor countries so as to help them “catch up.”
d. It is the idea that if investment spending is low, increased saving will help investment to “catch up.”
ANSWER: b
95. Which statement best explains the logic behind the catch-up effect?
a. Workers in countries with low incomes will work more hours than workers in countries with high incomes.
b. The capital stock in rich countries deteriorates at a higher rate because it already has a lot of capital.
c. New capital adds more to production in a country that doesn’t have much capital than in a country that
already has much capital.
d. Poor countries tend to save a higher share of their income than rich countries.
ANSWER: c
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96. Which country benefitted a lot from the catch-up effect in the last half of the twentieth century?
a. South Africa b. Russia
c. South Korea d. Greece
ANSWER: c
97. Which statement is consistent with the catch-up effect?

a. The United States had a lower growth rate before 1900 than after.
b. Japan has a higher growth rate than Germany.
c. Although Canada has a relatively high level of output per person, its growth rate is still high compared to
some poorer countries, such as Pakistan.
d. After World War II, Canada had lower growth rates than war-ravaged European countries.
ANSWER: d
98. From 1960 to 1990, what happened to the growth rates of Canada and South Korea?
a. South Korea had a higher growth rate than Canada because it had a higher ratio of investment to GDP.
b. Canada had a higher growth rate than South Korea because it had a higher ratio of investment to GDP.
c. South Korea had a higher growth rate than Canada, even though it had a similar ratio of investment to
GDP.
d. Canada had a higher growth rate than South Korea, even though it had a similar ratio of investment to GDP.
ANSWER: c
99. According to the traditional view of the production process, how does output per worker change when capital per
worker increases?
a. It increases. This increase is larger at larger values of capital per worker.
b. It increases. This increase is smaller at larger values of capital per worker.
c. It increases. This increase is the same at all values of capital per worker.
d. It decreases. This decrease is larger at larger values of capital per worker.
ANSWER: b
100. According to the traditional view, in what direction is the slope of the production function, with capital per worker on
the horizontal axis and output per worker on the vertical axis?
a. The slope is positive and becomes steeper as capital per worker rises.
b. The slope is positive and becomes flatter as capital per worker rises.
c. The slope is constant.
d. The slope is negative and becomes steeper as capital per worker rises.
ANSWER: b
101. If your Canadian-based firm opens and operates a new long board factory in Belize, what type of investment is your
firm engaging in?
a. foreign portfolio b. foreign financial investment
investment
c. foreign direct investment d. foreign capital investment
ANSWER: c
102. In the 1800s, Europeans purchased stock in Canadian companies, which used the funds to build railroads and
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factories. What type of investments did the Europeans make?
a. foreign portfolio b. foreign capital investments
investments
c. foreign direct investments d. foreign indirect investments
ANSWER: a
103. What type of investment has foreigners buying shares in domestic companies?

a. foreign direct investment b. foreign portfolio investment
c. foreign capital d. foreign indirect investment
investment
ANSWER: b
104. Suppose Canadian-based Bombardier decides to close a Canadian factory and move production to a foreign facility.
Bombardier then builds and operates a new factory in Mexico. What would the future production from such an investment
do?
a. increase Mexico’s GDP and decrease Canada’s GDP
b. increase both Mexico’s GDP and Canada’s GDP
c. increase Mexico’s GDP and leave Canada’s GDP unchanged
d. decrease Mexico’s GDP and increase Canada’s GDP
ANSWER: a
105. Suppose Canadian-based Bombardier cannot keep up with international growth, so it builds and operates a new
factory in Mexico. What would be the result of the future production from such an investment?
a. increase Mexico’s GDP and decrease Canada’s GDP
b. increase both Mexico’s GDP and Canada’s GDP
c. increase Mexico’s GDP and leave Canada’s GDP unchanged
d. decrease Mexico’s GDP and increase Canada’s GDP
ANSWER: c
106. Why would the opening of a new Canadian-owned factory in Egypt tend to increase Egypt’s GDP more than it
increases Egypt’s GNP?
a. Some of the income from the factory accrues to people who live in Egypt.
b. GDP is income earned by residents only, whereas GNP is income earned by residents and non-
residents.
c. All the income from the factory is included in Egypt’s GDP, but not all is included in GNP.
d. Foreign direct investment is part of GDP, but it is not part of GNP.
ANSWER: c
107. Which statement illustrates an implication of investment from abroad?

a. Foreign investment makes poor countries poorer.
b. Foreign investment promotes economic growth.
c. Foreign investment makes rich countries poorer.
d. Foreign investment is only beneficial to investors.
ANSWER: b

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108. Which organization tries to encourage the flow of investment to poor countries?
a. World Bank
b. Organization of Less Developed Countries
c. World Health Alliance
d. International Development Alliance
ANSWER: a
109. On average, by how much does each year of schooling raise a person’s wage in Canada?
a. about 5 percent b. about 10 percent
c. about 15 percent d. about 20 percent
ANSWER: b
110. What is generally an opportunity cost of investment in human capital?

a. future job security
b. forgone wages at present
c. increased earning potential
d. the cost of tuition during the years of
school
ANSWER: b
111. What is an externality aspect of education?

a. Education produces a return to society that is greater than the return to the
individual.
b. Education produces a return to society that is less than the return to the individual.
c. Education produces costs to society that are greater than the costs to the individual.
d. Education produces costs to the individual that are greater than the costs to society.
ANSWER: a
112. Which situation is an example of the “brain drain”?

a. A country’s most highly educated workers immigrate to rich countries.
b. A country has such a poor educational system that knowledge is lost over time.
c. A country’s population grows so fast that the educational system can’t keep up.
d. A country steals patented technology from another country.
ANSWER: a
113. What factor did economic historian Robert Fogel focus on as one determinant of long-run economic growth?
a. education b. national defence
c. nutrition d. trade restrictions
ANSWER: c
114. According to economic historian Robert Fogel, what proportion of the British population in 1780 was so
malnourished that they could not perform manual labour?

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ANSWER: b
115. What do property rights refer to?

a. a document stating the rights of ownership that accompany owning property
b. the ability of people to exercise authority over the resources they own
c. the right of the government to exercise authority over property owners
d. the right to use a common property
ANSWER: b
116. How does the political environment affect economic growth?

a. Political instability can reduce foreign investment, thus reducing growth.
b. Economic growth only depends on markets and production, while politics has no impact.
c. Policies designed to prevent imports from other countries generally increase economic growth.
d. Policies designed to restrict the immigration of foreign workers generally promote growth because wages
earned by foreigners are not part of GNP.
ANSWER: a
117. The dictator of Turan has recently begun to arbitrarily seize farms belonging to his political opponents, and he has
given the farms to his friends. His friends don’t know much about farming. The courts in Turan have ruled that the
seizures are illegal, but the dictator has ignored the rulings. Other things equal, what would we expect to happen to the
growth rate in Turan?
a. It will fall temporarily but will return to where it was when the new owners learn how to farm.
b. It will increase because the total amount of human capital in the country will increase as the new owners learn
how to farm.
c. It will fall and remain lower for a long time because other farmers may expect their farms to be seized
as well, and therefore they do not improve their farms.
d. It will increase because friends can better cooperate with each other, avoiding wasteful competition.
ANSWER: c
118. What is an effect of inward-oriented policies?

a. They impede growth because they restrict investment.
b. They have generally increased productivity and growth in the countries that pursued them.
c. They promote production of goods and services; the country that adopts them can produce most
efficiently.
d. They are likely to create more jobs for domestic workers.
ANSWER: a
119. What is a characteristic of inward-oriented policies?

a. They are generally supported by economists.
b. They are primarily concerned with the development of human capital.
c. They are in some ways like prohibiting the use of certain technologies.
d. They are generally rejected by domestic producers in import-competing
industries.
ANSWER: c

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120. The president of a developing country proposes that his country needs to help domestic firms by imposing trade
restrictions. What kind of policies are these?
a. These are outward-oriented policies and most economists believe they would have beneficial effects on
growth.
b. These are outward-oriented policies and most economists believe they would have adverse effects on growth.
c. These are inward-oriented policies and most economists believe they would have beneficial effects on growth.
d. These are inward-oriented policies and most economists believe they would have adverse effects on
growth.
ANSWER: d
121. Recently there have been violent protests the World Bank and the World Trade Organization. The protesters argue
that these institutions promote free trade and encourage corporations in rich countries to invest in poor countries. The
protesters contend that these practices make rich countries richer and poor countries poorer. How would economists feel
about these protesters’ views?
a. They would disagree with the protesters because these practices will help make both rich and poor
countries richer.
b. They would disagree with the protesters about free trade but would agree with the protesters about corporate
investment.
c. They would disagree with the protesters about corporate investment but would agree with the protesters about
free trade.
d. They would disagree with the protesters about free trade and corporations but would agree that these
institutions are not necessary.
ANSWER: a
122. What is an effect of outward-oriented policies?

a. Some countries gain and some lose from trade.
b. They have generally led to high growth for the countries that pursued them.
c. They impede growth in poor countries, but create more jobs.
d. They increase GDP, but also increase overall unemployment.
ANSWER: b
123. When a country removes trade barriers and exports milk and imports automobiles, what will most likely happen?
a. Its growth will slow down.
b. Its productivity will decrease.
c. It will essentially be transforming milk into automobiles.
d. Its economic well-being will decrease, while that of the country that sells
automobiles
will increase.
ANSWER: c
124. Once one person discovers an idea, the idea generally enters society’s pool of knowledge. Therefore, knowledge is
generally what kind of good?
a. a societal good b. a private good
c. a public good d. a normal good
ANSWER: c

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125. Senator Noitall says that in order to help poor countries develop, Canada should (1) prevent Canadian corporations
from investing in poor countries because they take profits that the poor countries should have; (2) not import goods from
poor countries that use child labour; (3) work to promote political stability in poor countries; and (4) reduce poor
countries’ reliance on market forces in their economies. Which of these ideas is likely to help poor countries grow?
a. 1 b. 2
c. 3 d. 4
ANSWER: c
126. What is a valid policy to use for increasing the rate of economic growth?
a. reduce reliance on market forces because they allocate goods and services in an unfair manner
b. encourage trade with neighbouring countries
c. increase the fraction of GDP devoted to consumption
d. restrict investment in domestic industries by foreigners because they take some of the profits out of the
country
ANSWER: b
127. In medieval Europe, an important technological advance was the use of the padded horse collar for plowing. Once
this idea was thought of, other people used it. What does this example illustrate about knowledge?
a. It is generally a public good. b. It is generally a societal good.
c. It is generally a private good. d. It is generally a normal good.
ANSWER: a
128. What is the source of most technological progress?

a. private research by firms and individual inventors
b. private research by firms and government
c. government research
d. government-sponsored research by universities
ANSWER: a
129. According to an economist, what kind of goods are national defence and knowledge?
a. private goods b. public goods
c. investment goods d. common resource goods
ANSWER: b
130. Which of the following goods does a patent turn a new idea into?
a. a public good, which increases the incentive to engage in research
b. a public good, which decreases the incentive to engage in research
c. a private good, which increases the incentive to engage in research
d. a private good, which decreases the incentive to engage in research
ANSWER: c
131. Drug companies can usually obtain patents on new drugs. Which goods do patents turn new ideas into?
a. private goods, which increase the incentive to engage in research
b. private goods, which decrease the incentive to engage in research
c. public goods, which increase the incentive to engage in research
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d. public goods, which decrease the incentive to engage in research
ANSWER: a
132. The economic development minister of a country has a list of things she thinks may explain her country’s low growth
of real GDP per person relative to other countries. She asks you to pick the one you think most likely explains her
country’s low growth. What contributes to low growth?
a. strong private property rights b. tariffs and quotas
c. encouraging foreign investment d. low population growth
ANSWER: b
133. According to Malthus’s view, what is a consequence of increased population?

a. increased GDP per person
b. more people imply more ideas and more labour force, which promotes growth
c. depletion of productive resources and lower standards of living
d. increase in productivity in the food sector, which is necessary to support the increase in
population
ANSWER: c
134. From 1983 to 1988, at what rate did Canadian productivity grow?

ANSWER: b
135. From 2001 to 2018, what was the growth in Canadian productivity?

ANSWER: a
136. Which statement best describes the evolution of productivity growth in Canada?

a. From 1974 to 1982, Canadian productivity growth was slower than from 1966 to 1973. This continued a long-
term downward trend in productivity growth.
b. From 1974 to 1982, Canadian productivity growth was slower than from 1966 to 1973. It appears that
this was the result of a slowdown in technological progress.
c. From 1966 to 1973, Canadian productivity growth was slower than from 1974 to 1982. This continued an
upward trend in productivity growth.
d. From 1966 to 1973, Canadian productivity growth was slower than from 1974 to 1982. It appears that this was
the result of an upward trend in capital formation.
ANSWER: b
137. There is some controversy concerning what the source of the Canadian productivity slowdown was in the period of
1974 to 1982. What is the most likely explanation?
a. a decrease in the growth of human capital per
person
b. capital wearing out so that capital per person fell
c. changes in technological progress

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d. the continued depletion of natural resources
ANSWER: c
138. All else equal, which of the following would tend to cause GDP per person to rise?
a. high immigration growth
b. investment in human capital
c. rapid growth in the labour force population
d. policies to reduce imports
ANSWER: b
139. What will a rapid increase in the number of workers, other things the same, likely do in the short term?
a. raise real GDP per person but decrease real GDP
b. decrease both real GDP and real GDP per person
c. raise both real GDP and real GDP per person
d. raise real GDP but decrease real GDP per person
ANSWER: d
140. Which statement illustrates an important fact about population growth?

a. There are no substantial differences between rates of growth in population among
countries.
b. In developed countries, population tends to grow slower than in developing countries.
c. Higher rate of growth in population implies higher productivity.
d. A country that increases its population growth rate will increase its economic growth rate.
ANSWER: b
141. Economist Michael Kremer provides some support for the hypothesis that an increase in population might foster
economic prosperity. Which statement best explains this hypothesis?
a. More people can produce more ideas, which contribute to increasing productivity.
b. More people can produce more output, everything else being the same.
c. A larger population implies more demand for goods and services, which stimulates the economy.
d. When there is many children, governments need to invest more in education, which fosters economic
growth.
ANSWER: a
142. Why do birth rates tend to be lower in developed countries than in developing countries?
a. because people are older in developed countries
b. because education is more expensive in developed countries
c. because women with the opportunity to receive a good education and desirable employment tend to
want fewer children
d. because government policies in developing countries reward families with children
ANSWER: c
143. What is the key difference between Thomas Malthus and Michael Kremer’s theories about population growth?
a. Kremer argued that with greater population, society would generate more ideas so that growth of real
GDP per person could continue. Malthus argued that increasing population would outstrip agricultural
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production and economies will eventually decline irreversibly.
b. Kremer argued that increases in population would reduce the amount of human and physical capital per
worker so that eventually the standard of living would decline. Malthus argued that increases in technology
would allow increased output growth so that even with population growth, society would enjoy a higher
standard of living.
c. Malthus argued that with greater population, society would generate more ideas so that growth of real GDP
per person could continue. Kremer argued that increasing population would outstrip agricultural production
and economies will eventually decline irreversibly.
d. Malthus argued that increases in population would reduce the amount of human and physical capital per
worker so that eventually the standard of living would decline. Kremer argued that increases in technology
would allow increased output growth so that even with population growth, society would enjoy a higher
standard of living.
ANSWER: a
144. Economists differ in their views of the role of the government in promoting economic growth. According to the text,
at the very least, what should the government do?
a. lend support to the invisible hand by maintaining property rights and political
stability
b. limit foreign investment to industries that don’t already exist
c. impose trade restrictions to protect the interests of domestic producers and consumers
d. subsidize key industries
ANSWER: a
145. The average person in a rich country, such as Germany, has income about ten times that of an average person in a
poor country, such as Indonesia.
a. True
b. False
a. True
b. False
ANSWER: True
146. Both the standard of living and the growth of real GDP per person vary widely across countries.
a. True
b. False
a. True
b. False
ANSWER: True
147. In Canada real GDP per person is over $55,000, while in poor countries real GDP per person may be around $5000.
a. True
b. False
a. True
b. False
ANSWER: True
148. Although growth rates across countries vary, rankings of countries by income remain pretty much the same over
time.
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a. True
b. False
a. True
b. False
ANSWER: False
149. International data on the history of real GDP growth rates show that the rich countries get richer and the poor
countries get poorer.
a. True
b. False
a. True
b. False
ANSWER: False
150. Productivity can be found as number of hours worked divided by output.

a. True
b. False
a. True
b. False
ANSWER: False
151. Indonesians have a lower standard of living than Canadians because they have a lower level of productivity.
a. True
b. False
a. True
b. False
ANSWER: True
152. A forest is an example of a nonrenewable resource.

a. True
b. False
a. True
b. False
ANSWER: False
153. Changes in the prices of most natural resources compared to other goods indicate that natural resources are generally
becoming scarcer.
a. True
b. False
a. True
b. False
ANSWER: False
154. A country without a lot of domestic natural resources can have a high standard of living.
a. True
b. False
a. True
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b. False
ANSWER: True
155. Constant returns to scale is the point on a production function where increasing inputs will no longer increase output.
a. True
b. False
a. True
b. False
ANSWER: False
156. An increase in the saving rate does not permanently increase the growth rate of real GDP per person.
a. True
b. False
a. True
b. False
ANSWER: True
157. Other things the same, countries with low income are likely to increase their income more by adding another unit of
capital than are countries that have high income.
a. True
b. False
a. True
b. False
ANSWER: True
158. From 1960 to 1990, the ratio of investment to GDP in South Korea was higher than in Canada and so South Korea
had substantially higher growth.
a. True
b. False
a. True
b. False
ANSWER: False
159. In ten years, when you are the owner of a major Canadian corporation, if your corporation opens and operates a
branch in a foreign country you will be engaging in foreign direct investment.
a. True
b. False
a. True
b. False
ANSWER: True
160. Investment in both human and physical capital has opportunity costs.

a. True
b. False
a. True
b. False

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ANSWER: True
161. A country that made its courts less corrupt and its government more stable would likely see its standard of living rise.
a. True
b. False
a. True
b. False
ANSWER: True
162. Economists generally believe that outward-oriented policies are more likely to foster growth than inward-oriented
policies.
a. True
b. False
a. True
b. False
ANSWER: True
163. One reason that governments may find it useful to sponsor universities and basic research is that, to a large extent,
knowledge is a public good.
a. True
b. False
a. True
b. False
ANSWER: True
164. If the productivity slowdown had not occurred in 1973, the income of the average Canadian today would be about 70
percent higher.
a. True
b. False
a. True
b. False
ANSWER: False
165. The productivity slowdown in 1973 appears to be primarily the result of a decrease in the capital to labour ratio.
a. True
b. False
a. True
b. False
ANSWER: False
166. The annual population growth rate in developed countries is about 1 percent, while the growth rate in developing
countries is about 3 percent.
a. True
b. False
a. True
b. False
ANSWER: True
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167. In countries where women are discriminated against, policies that increase their career and educational opportunities
are likely to increase the birth rate.
a. True
b. False
a. True
b. False
ANSWER: False
168. Michael Kremer found that world growth rates have increased as world population has.
a. True
b. False
a. True
b. False
ANSWER: True
169. Use the data below to find the growth of income per person (over the entire period, not an annual basis) between the
two years listed.
Year Real GDP Population

2000 $915,600 million 30 million
2020 $1,243,800 million 35 million
ANSWER: Income per person in 2000 was $915,600/30 = about $30,520. Income per person in 2020 was $1,243,800/35
= about $35,537. Income per person grew by (35,537 – 30,520)/30,520) *100= about 16.4 percent.
170. Why is productivity related to the standard of living? In your answer be sure to explain what productivity and
standard of living mean. Make a list of things that determine labour productivity.
ANSWER: The standard of living is a measure of how well people live. Income per person is an important dimension of
the standard of living and is positively correlated with other things such as nutrition and life expectancy that
make people better off. Productivity measures how much people can produce in an hour. As productivity
increases, people can produce more (and use less to produce the same amount) and so their standard of living
increases.
The factors that determine labour productivity include the amounts of physical capital (equipment and
structures), human capital (knowledge and skills), and natural resources available to workers, as well as the
state of technological knowledge in society.
171. What is a production function? Write an equation for a typical production function, and explain what each of the
terms represents.
ANSWER: A production function is a mathematical representation of the relationship between the quantity of inputs used
in production and the quantity of output from production. A typical production function could be written as Y
= A F(L, K, H, N), where Y denotes the quantity of output, L the quantity of labour, K the quantity of physical
capital, H the quantity of human capital, N the quantity of natural resources, and A is a variable that reflects
the available production technology.
172. What is the difference between human capital and technology?

ANSWER: Technology is society’s understanding of production techniques. Human capital is the labour force’s
understanding of these ideas. A society may have lots of information about how to produce goods, but still
have lots of people who know little of this information. For example, in Canada there exists information about
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how best to use a butter churn and how to make lye soap, but most people know nothing about it.
173. The catch-up effect says that countries with low income can grow faster than countries with higher income.
However, in statistical studies that include many diverse countries, we do not observe the catch-up effect unless we
control for other variables that affect productivity. Considering the determinants of productivity, list and explain some
things that would tend to prohibit or limit a poor country’s ability to catch up with the rich ones.
ANSWER: The argument that poor countries will tend to catch up with rich ones is based on the idea that another unit of
capital will increase output more in a country that has little capital than one that has much capital. So, for a
given share of GDP devoted to investment, a poor country will grow faster than a rich one.
This argument assumes that other things are the same, but share of GDP invested may be lower in a poor
country and the productivity of investment may be less. A politically unstable environment where property
rights are unprotected or not secure tends to discourage investment. A country that has limited trade because
of legal restrictions or geography cannot focus on producing what it produces best and so has lower
productivity. To get the most out of investment, or even simply to use some types of new investment, requires
having workers who have acquired some basic human capital.
174. A puzzle: The share of GDP devoted to investment was similar for Canada and South Korea over the period 1960–
1990. However, South Korea had a 7 percent growth rate of average annual income, while Canada had only a 2.5 percent
growth rate. How can this be explained?
ANSWER: The solution to the puzzle is based on the concept of diminishing returns to capital. A country that has a lot of
income, and so a lot of capital, gains less by adding more capital than does a country that currently has little
capital. It is easy to envision how a capital poor country could increase its output considerably with even a
little more capital.
175. In addition to investment in physical and human capital, what other public policies might a country adopt to increase
productivity?
ANSWER: In addition to investment in physical and human capital, a country might increase productivity by (a)
specifying and enforcing property rights, (b) encouraging free trade, (c) controlling population growth, and (d)
promoting research and development.
176. Why are property rights important for the growth of a nation’s standard of living?
ANSWER: Property rights are an important prerequisite for the price system to work in a market economy. If an
individual or company is not confident that claims over property or over the income from property can be
protected, or that contracts can be enforced, there will be little incentive for individuals to save, invest, or start
new businesses. Likewise, there will be little incentive for foreigners to invest in the real or financial assets of
the country. The distortion of incentives will reduce efficiency in resource allocation and will reduce saving
and investment, which in turn will reduce the standard of living.
177. How do inward-oriented policies affect a nation’s growth?

ANSWER: Most economists believe that poor nations are better off pursuing outward-oriented policies that promote free
trade. Countries that use their comparative advantage in trade are, in effect, helping themselves through the
gains from trade in the same way that nations that develop new technology raise their standard of living.
Hence, a country that eliminates trade restrictions will experience the same kind of economic growth that
would occur after a major technological advance. Inward-oriented trade policies are akin to a country choosing
to restrict the use of superior technologies.
178. Some economists argue that it is possible to raise the standard of living by reducing population growth. As an
economist interested in incentives rather than coercion, what kind of policy would you recommend to slow population
growth?
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ANSWER: Since bearing a child has an opportunity cost, policies designed to increase the opportunity cost of bearing
children would likely reduce population growth rates. In particular, women with the opportunity to receive a
good education and desirable employment tend to want to have fewer children than do those with fewer
opportunities outside the home. Hence, policies designed to increase educational and employment
opportunities for women will likely reduce population growth rates without coercion.
179. Compare and contrast the population theories of Malthus and Kremer.

ANSWER: The difference is that Malthus predicted that population growth would have a greater impact than growth in
the ability to increase output. He believed that people would continue to populate the earth until output
reached a subsistence level. On the other hand, Kremer argues that population growth increased productivity
allowing people to improve their standard of living despite growing population. Kremer argues that with more
population comes more innovations. The improvements in technology more than offset any adverse impact of
the increase in population on the standard of living.
180. What might the African governments do to foster higher economic growth?

ANSWER: They could make, perhaps with outside support, better efforts to achieve peace and thus encourage investment
and saving. They could focus government spending on essential things like public order, the judicial system,
and basic health and education. By focusing on these basic functions, they could decrease tax rates on
production and trade.
181. Some civil society groups and activists propose a zero-economic-growth policy in order to preserve the environment.
Write an essay to discuss the pros and cons of this proposal. You may wish to refer, among other ideas, to the following:
∙ Economic growth needs to compensate for the increase in population.
∙ If population becomes older, the number of active persons decreases; therefore, productivity must increase to sustain a
high standard of living.
∙ An increase in standard of living is only possible if an economy becomes more productive. (Income per person is closely
related to labour productivity.)
∙ It is hoped that economic growth will eventually eradicate poverty.
∙ Economic measures of well-being, such as GDP per capita, are imperfect mainly because they disregard external costs of
economic activity, as well as other aspects of life that people value, such as leisure, fairness, and income equality.
ANSWER: There is no “correct” answer to this problem. The essay should refer to the points made above. It should be
creative and well-articulated.
182. Suppose an economy uses only two inputs in production: capital and labour. The following table describes a
production function, where y stands for output per worker and k is capital per worker.
a) Draw approximately this production function with y on the vertical axis.

b) Show that this production function exhibits diminishing returns to scale.
c) Suppose there are two countries, A and B. The economies of the two countries can be described by this production
function. If Country A has initially a capital–labour ratio k = 0.167 and Country B has k = 0.412, show that an equal
increase in capital produces more extra output in country A than in Country B.
y k
0.000 0.000
0.173 0.030
0.302 0.091
0.408 0.167
0.480 0.231
0.535 0.286
0.577 0.333
Name: Class: Date:

0.612 0.375
0.642 0.412
0.667 0.444
0.688 0.474
0.707 0.500
0.724 0.524
0.739 0.545
ANSWER:
a) Here is a graph of the given production function:
Figure 7-1
b) Take, for instance, k = 0.167 and the corresponding y = 0.408. For the next value of k, which is k = 0.231,
the increase in k is equal to 0.231/0.167 = 1.383, while the corresponding increase in y is only 0.480/0.408 =
1.176. Thus, when k increases 1.383 times, y increases only 1.176 times, which shows the diminishing returns
to scale of this production function.
c) Let us take first Country A. When k increases from 0.167 to 0.231, the change in k is -k = 0.064 and the
corresponding change in y is -y = 0.480 – 0.408 = 0.072. The change in output per unit change in capital (the
slope of the production function, or the marginal product of capital) is -y/-k = 0.072/0.064 = 1.125 units of
output per unit of additional capital. For Country B, the marginal product of capital is determined in a similar
way, and the result is -y/-k = 0.781. Since the marginal product of capital is less in Country B than in Country
A, we say that there is a catch-up effect.
183. The purpose of this problem is to make you acquainted with Statistics Canada’s website. Open
http://www.statcan.gc.ca/start-debut-eng.html and look for “Real gross domestic product, expenditure-based, by province
and territory.” Answer the following questions based on this table.
a) Which three provinces had the greatest real GDP per capita in 2017?
Name: Class: Date:

b) Calculate the shares of each of these provinces in Canada’s real GDP in 2017.
c) Now, look for another table “Inter-city indexes of price differentials in consumer goods and services.” In which city
was the consumer price index the highest in both of the years 2017 and 2018? Can you think of an explanation for that?
ANSWER: a) Ontario, Quebec, and Alberta
b) 0.377, 0.199, 0.143
c) The city experiencing the highest increase in prices, as reflected by consumer price index, is Yellowknife.
An explanation may be its location and the very high prices for housing.
184. The real GDP per capita in an economy increases at a rate of 2.6 percent. Calculate the number of years that it takes
for real GDP to double. Assuming that the current GDP per capita is $40,000 and the growth rate will be on average 2.6
percent, how much will GDP per capita be after 10 years? After 20 years? After 30 years? Draw a graph to show
approximately the evolution of this economy for the next 30 years.
ANSWER: Let us denote real GDP per capita by Y. At a rate of 2.6 percent, it will double in N years. The formula that
gives the new value of real GDP per capita, which we know it must be 2Y, is Y(1 + 0.026)N = 2Y. We divide
this equation by Y, to get (1 + 0.026)N = 2. If we take logarithms of both sides of the equation and apply the
rules of logarithms, we find N × Ln (1.026) = Ln(2). Solving this equation for N, the result is N = 27 years.
If Y = $40,000 after 10 years, it becomes 40,000(1 + 0.026)10 = $51 705; after 20 years it will be $66,836;
and in 30 years it will become $86,393.
185. Read the article “Are jobs obsolete?” by Douglas Rushkoff, Special to CNN September 7, 2011
(http://goo.gl/0aUXL).
a) What are the main points of the article?

b) One of the principles of economics is that a country’s standard of living depends on the country’s ability to produce
goods and services, while one of the main points of the article suggests that productivity is no longer a goal in the U.S.
because the American economy is already able to produce enough for all its people. Does the author’s opinion contradict
the economic principle?
c) Economic theory suggests that technological innovation is an important factor of economic growth. The article, on the
other hand, opines that new technologies destroy more jobs than they create. Is this statement true? (Look for extra
information that might or might not support this statement.) Does this statement contradict economic theory?
ANSWER: The answers depend on students’ opinions; credit is given for good arguments, appeal to economic theories –
whether supporting them or not, and in general for thoughtful discussion.
186. The following is a comment to the article “Are jobs obsolete?” by Douglas Rushkoff, Special to CNN September 7,
2011 (http://goo.gl/0aUXL):
Karaya: “We are at the point where the growth of human population becomes liability rather than asset. Higher
sustainable standards of living can be maintained with much less population, and population growth actually can lead to
humankind decline - just by depletion of environmental resources alone.”
Karaya’s comment implies that lower population would actually increase standards of living due to advances in
technology. What do theories of growth have to say about the effect of population increase on economic prosperity? Is
there a connection between a country’s population, its technology, and its standard of living? What kind of information
would you need to try to answer this question? How would an answer to this question look like?
ANSWER: Students may have various opinions on the issue. However, credit should be given to those who better relate
their answers to the theories of economic growth discussed in class, whether confirming or refuting those
theories. Credit should be given to those who correctly identify the tradeoffs implied by population growth. To
investigate the role of technology in reversing the effect of population on growth, one should look at countries
with similar technologies but different populations or similar populations and different technologies. Karaya’s
Name: Class: Date:

claim is probably difficult to sustain because data would probably provide inconclusive results.
187. The article “Are jobs obsolete?” by Douglas Rushkoff, Special to CNN September 7, 2011, states the following
(http://goo.gl/0aUXL):
“According to the U.N. Food and Agriculture Organization, there is enough food produced to provide everyone in the
world with 2,720 kilocalories per person per day. And that's even after America disposes of thousands of tons of crop and
dairy just to keep market prices high. Meanwhile, American banks overloaded with foreclosed properties are demolishing
vacant dwellings to get the empty houses off their books.”
a) Is it true that “America disposes of thousands of tons of crop and diary to keep market prices high?” (Search for
additional sources of information in this regard.) What would be the effect of such policies on economic growth?
b) If there is a surplus of commodities in the developed world, why is it not given in aid to poor countries? (You may need
to look for further information to answer this question.)
ANSWER: a) During the Great Depression, companies may have discarded crops to keep prices high. It may still be true,
but there are no obvious facts to prove it. However, most developed countries have in place various
agricultural policies of subsidizing farmers who restrict their production, which has similar effects on prices as
destroying crops. Such policies may not affect the measured economic growth, but they certainly affect
standards of living: higher prices divert income from other uses.
b) Giving away any commodities anywhere destroys local markets and businesses. In the past, such actions
encountered strong political opposition.
188. Read the article “What Makes a Nation Rich?” by Daron Acemoglu in your textbook, and write a one-page summary
of the article (Times New Roman, size 12, double spaced). (You can find some guidelines on how to write a summary
here: http://goo.gl/CncBb.)
ANSWER: The summary should be concise and it should provide an accurate picture of the author’s opinion. It should
start with a thesis statement (author’s, not student’s thesis.) Follow the advice in the link provided.
189. For background, read the article “Fruit pickers: ‘The money we earn is not worth getting out of bed for’”
(http://goo.gl/MCQcC). This article apparently has very little to do with economic growth theories. However, it offers an
excellent opportunity to better understand some important aspects of economic growth and development. Fruit picking is
one area where technological progress is slow or nonexistent. For instance, strawberry-picking robots are still far from
taking the jobs of the thousands of workers employed in the field. Suppose a worker is paid the minimum wage, which is,
let’s say $8 in the UK and $3 in Bulgaria. Suppose a worker in the UK is able to pick 10 kilos of strawberries in one hour,
the same as a worker in Bulgaria. Suppose all strawberries picked in the UK and Bulgaria are exported to countries such
as Norway, where they sell for $10 a kilo.
a) Where does a fruit-picking worker have higher productivity, in the UK or in Bulgaria? Why are they paid different
wages?
b) British people complain that foreign immigrants “steal” their jobs. Why would a British worker not want to take such a
job? Why would an employer in the UK wish to hire a Bulgarian worker instead of a British one? More generally, why do
developed countries tend to “export” low-productivity jobs? Does this reduce the standards of living in the developed
countries?
ANSWER: a) By definition, productivity is the quantity of output that a worker produces in an hour. (It could be also
defined as the “value” produced, but this definition makes productivity definition less precise.) If “output” is
understood as the quantity of strawberries produced in an hour, then the two workers have the same
productivity. Why are they paid different wages? This question is beyond the scope of this chapter, but it is
still a legitimate question and an astute student will notice that this is by no means a trivial question. For now,
one can just say that wages reflect, at least in part, local costs of living. Costs of living are probably lower in
Bulgaria than in the UK. Yet this answer is not completely satisfactory if we remember that the two workers
Name: Class: Date:

still have equal productivities.
b) A UK resident might not want low-paying jobs because the minimum wage is insufficient for living a
decent life in the UK. Therefore, the complaint that foreign workers steal British jobs might not be completely
justified. British employers should not need to discriminate between local and foreign workers as long as
workers are equally productive and they cost the same. If British employers do prefer foreigners to locals, it
must be that somehow foreigners accept – legally or not – harsher conditions. Rich countries tend to export
low productivity – and low-paying jobs – because the pay tends to be too low for the standards of living
desired by local residents. Whether exporting such jobs reduces standards of living in the rich country or not is
hard to say, but it certainly affects those few residents who might be willing to accept such jobs, at least
temporarily.
190. Technological innovations, by increasing productivity in manufacturing, have brought about some expected, as well
as some unexpected, changes. A notable change is the disappearance of some occupations; another is, paradoxically, that
people now do more unskilled work for themselves than they used to do a decade ago.
a) Name a few occupations that have disappeared, or may disappear in the near future, as they are being replaced by
machines.
b) Name a few occupations that have disappeared or may disappear as a side effect of the general increase in productivity.
c) How would economic growth force many people to do more housework by themselves?
ANSWER: a) A quick Internet search for “disappearing jobs” will answer this one. (Here is an interesting piece:
http://goo.gl/PWcfa.)
b) An important category of such jobs are the shoe-repairer type, because it costs less to make a new pair than
to repair one.
c) Because of the general increase in productivity, a worker’s hour – no matter what kind of work that might
be, even driving to your home for pizza delivery – became so expensive than many people prefer to do without
some services or to do by themselves more work such as cooking, cleaning, filing their taxes, online investing,
and so on.

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Chapter 7 - Production and Growth

Chapter 7 - Production and Growth

Chapter 7 - Production and Growth

17. In 1870, what was the richest country in the world?

20. Which statement best defines productivity?

Chapter 7 - Production and Growth

28. What is a correct way to measure productivity?

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Chapter 7 - Production and Growth

30. Why are Canadian workers more productive than the Chinese?

Chapter 7 - Production and Growth

35. What is a direct determinant of productivity?

39. Which of the following would NOT be considered physical capital?

40. Which of the following would be considered physical capital?

41. What best defines human capital?

Chapter 7 - Production and Growth

42. Which of the following is considered human capital?

43. Which of the following is considered human capital?

44. Which of the following is considered human capital?

46. Which of the following best describes natural resources?

Chapter 7 - Production and Growth

48. What is an example of a non-renewable resource?

52. What indicates greater scarcity of a natural resource?

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Chapter 7 - Production and Growth

Chapter 7 - Production and Growth

60. Which statement best defines proprietary technology?

63. Which statement best defines technological knowledge?

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Chapter 7 - Production and Growth

Chapter 7 - Production and Growth

73. Which of the following does Y/L refer to?

76. What would increase productivity, everything else being the same?

78. What is one of the consequences of accumulating capital?

Chapter 7 - Production and Growth

82. What does diminishing returns to capital imply?

83. What is the effect of a higher saving rate in the long run?

Chapter 7 - Production and Growth

89. Other things equal, how do relatively poor countries tend to grow?

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Chapter 7 - Production and Growth

94. Which statement best defines the catch-up effect?

Chapter 7 - Production and Growth

97. Which statement is consistent with the catch-up effect?

Chapter 7 - Production and Growth

103. What type of investment has foreigners buying shares in domestic companies?

107. Which statement illustrates an implication of investment from abroad?

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Chapter 7 - Production and Growth

110. What is generally an opportunity cost of investment in human capital?

111. What is an externality aspect of education?

112. Which situation is an example of the “brain drain”?

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Chapter 7 - Production and Growth

115. What do property rights refer to?

116. How does the political environment affect economic growth?

118. What is an effect of inward-oriented policies?

119. What is a characteristic of inward-oriented policies?

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Chapter 7 - Production and Growth

122. What is an effect of outward-oriented policies?

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